European Union countries could be obliged to bail out one another’s struggling banks

Submitted by IWB, on May 29th, 2012

Reuters

European Union countries could be obliged to bail out one another’s struggling banks, according to a draft EU law that marks a big step towards greater EU financial integration likely to upset some members, particularly Germany.

Spain’s banking troubles and the risk that a bank run in a country such asGreece could spread have given new impetus to delayed EU proposals for a law to deal with failing banks.

The European Commission, the EU’s executive, will propose the rules on June 6, to grant local regulators what one official described as “aggressive intervention powers” to take control of stricken banks, break them up and impose losses on their bondholders.

If accepted by EU member countries, it would be a first step towards a pan-EU system of supervising and paying for the winding up of banks in difficulty, a vital element of the “banking union” the European Central Bank has called for.

The law, which could come into effect as early as 2014, would introduce what some officials describe as an insolvency regime for banks in the EU.

It would also instruct countries to prepare for the collapse of a bank, by collecting the equivalent of 1 percent of bank deposits from an annual levy on banks.